Aggregate Uncertainty and the Supply of Credit
IMF Working Papers, December 2, 2013
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Bibliographic details
- Authors: Fabian Valencia
- Published: December 2, 2013
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781475513936.001
Main research question and model
- Examines how uncertainty shocks affect the supply of credit.
- Presents a model in which a bank, even if managed by risk-neutral shareholders and subject to limited liability, can exhibit self-insurance, leading loan supply to contract when uncertainty increases.
Data, identification, and scope
- Empirical test uses the universe of U.S. commercial banks over the period 1984-2010.
- Identification of credit supply is achieved by looking at the differential response of banks according to their level of capitalization.
- Results are reported for the full sample and for subsamples, including separate assessment for large banks.
Key empirical findings
- Increases in uncertainty reduce the supply of credit.
- The contraction in loan supply is larger for banks with lower levels of capitalization.
- Results are weaker for large banks.
- Findings are robust to:
- controlling for the lending and capital channels of monetary policy,
- using different measures of uncertainty,
- breaking the dataset into subsamples.
- Quantitatively, uncertainty shocks are almost as important as monetary policy ones with regards to the effects on the supply of credit.
Subject areas and keywords
- Subject: Bank credit, Banking, Credit, Economic theory, Financial frictions, Financial institutions, GDP forecasting, Loans, Money, National accounts
- Keywords: A. bank-borrower loan contract, bank capital, Bank credit, bank default, bank level, capital-to-asset ratio, capitalized bank, Credit, Credit Crunch, Credit Cycles, Financial frictions, GDP forecasting, interest rate, Loans, monetary policy, natural logarithm, Self-insurance, Uncertainty, WP